SAP's Moment -- Part II

SAP, WITH A MARKET VALUE of $55 billion, was founded in 1972 by five former IBM executives in Germany, including the legendary programmer Hasso Plattner, who stepped down as co-CEO in May 2003. Kagermann has been running day-to-day operations for several years, and Plattner has compared his stepping down to a similar move by Microsoft Chairman Bill Gates, who relinquished his CEO title CEO to Steve Ballmer in 2000. Today, Plattner remains chairman of the supervisory board, a non-management advisory panel unique to German corporate structure.

Although SAP is often described as bland, Plattner is anything but. He earned a permanent place in industry lore for "mooning" Ellison during a yacht race off Hawaii about eight years ago. Unimpressed by Ellison's sportsmanship, when Ellison passed his boat disabled by a cracked mast without stopping to help, Plattner, from the deck of his yacht, turned his back toward Ellison's vessel and dropped his pants to half-mast.

Kagermann, age 57, hardly seems like one to moon -- but he has certainly been taking notice of Ellison. In fact, Ellison's bold bid for PeopleSoft nearly pushed SAP into the arms of Microsoft. With consolidation suddenly a front-burner issue in software, it was only natural that SAP and Microsoft should consider hooking up. Both Kagermann and Ballmer acknowledged that the companies were in serious talks, but the SAP chief says those discussions have since gone cold.

"We...thought it was a good idea," Kagermann says of the proposed union. And it's easy to see why: With Microsoft dominating the desktop and creeping into the lower end of enterprise computing, and with SAP supplying the corporate behemoths, the two companies barely overlap and would have created an unfathomable force had they tied the knot.

But after a few talks, both sides began to comprehend the enormous task of combining the two software giants. "You think about the complexity, and then it doesn't really make sense," Kagermann says.

While SAP and Microsoft haven't gotten married, they appear to have moved in together, says analyst Bill Whyman of the Washington-based research firm Precursor Group. The two -- which long have collaborated in addition to competing -- have tightened their business ties and increased their technical and product integrations, Whyman says. More than 60% of new SAP installations are on Microsoft's Windows operating system, and SAP supports certain Microsoft programming tools for developing next-generation applications. That adds up to some of the benefits of a merger without the disruption.

SAP's greatest opportunity lies beyond Microsoft -- in a change taking place in the buying habits of corporate technology chiefs. Many of them no longer have the patience, or lavish budgets, for the costly wares of smaller, more specialized competitors. And they want "fewer necks to choke" when technology malfunctions. A report on tech spending released last week by Goldman Sachs noted that businesses are "still in the upswing part of the trend toward fewer, larger vendors."

SAP has been able to gain market share by steadily increasing the breadth and depth of its offerings. That's attracted new customers and given existing ones reasons to order more software. Some companies have shown their allegiance by ripping out their specialized "best of breed" applications and replacing them with comparable SAP offerings.

SAP has hired some 2,500 people this year to take advantage of the trend, boosting its total headcount by 9%, to more than 30,000. Although costly, larger sales teams could prompt customers to spend more.

The company hopes to wean customers from its proprietary offering for clusters of linked personal computers, known as R3, and sell them on the benefits of its Web-enabled mySAP system -- which lets workers in different locations tap into their companies' various business-software applications via the Internet. By using mySAP, companies also can implement a larger assortment of SAP's latest business applications.

The other big new product is NetWeaver, which is a stack of software built on an application server-plus, as Kagermann describes it. Application servers allow different applications, or software flavors, to talk to each other via the Internet. While most of SAP's products in the past were written in proprietary code, NetWeaver uses a more open code that works with software from other companies. For example, PeopleSoft human-resource applications can interact with SAP accounting software. NetWeaver also provides Internet portals for accessing information, and data-warehouse and "business-intelligence" capabilities for analyzing trends.

The stronger sales from transitions to mySAP and installments of NetWeaver should lead to greater application sales to big corporations. At the same time, SAP is making inroads into the wide-open middle tier by launching more affordable solutions for small and mid-sized companies. In all, Goldman's Sherlund expects SAP to increase its global market share among the top five enterprise vendors to 64% by the end of this year. Other than Cisco in networking, the only tech outfit with that kind of market dominance is Microsoft.

WORKING FROM WALLDORF, in a headquarters building just minutes from historic Heidelberg, Kagermann is fully aware of what SAP is on the brink of achieving. In a conference room overlooking a high-tech complex that could be mistaken for certain corporate campuses in Redmond, Wash., or San Jose, Calif., he ticks off the opportunities. "We know what to do," he concludes, "but we have to execute, and it's a way to go."

Not that long ago, many critics thought SAP was heading in the wrong direction. In the late 1990s, as Web-based software systems such as Salesforce.com were being nurtured by venture capitalists, the conventional wisdom was that SAP was missing the Internet boat. SAP's costly and complex legacy enterprise systems, critics said, eventually would be supplanted by Web-enabled solutions allowing different departments across vast corporations to share data easily.

At the time, the company's reputation among some customers was far from enviable. SAP software was infamous for being difficult to install and often coming in over budget. During a critical Halloween season, Hershey's blamed SAP for the candy maker's failure to have the proper stock of candy in inventory.

SAP looked cumbersome and too dependent on yesterday's high-cost business model. Internet-based business-software solutions, such as those from supply-chain management firms such as
i2 Technologies,Ariba
and Commerce One, were nimbly exploiting the Web -- and SAP wasn't. "The Germans don't get the Net" -- or so thought the critics.

But something funny happened on the way to the new economy. SAP's engineers went to the drawing board, plotting their strategy to compete against the onslaught of best-of-breed products. SAP quickly went from being a laggard in e-business applications to a vigorous competitor.

To the surprise of many, SAP harnessed the energy of the dot-com boom to improve its products and make them more user-friendly. SAP's e-business solutions weren't always as good as the others, but they were good enough -- and they continued to get better with every new version, at a methodical, steady pace that is a trademark of the German software maker. SAP kept plugging away through the technology downturn of 2000 through 2002, continuing to improve and market its new initiatives.

Today, SAP's customer-relations management software outsells the products of Siebel Systems, which pioneered such software nearly a decade ago. SAP also has taken the lead in supply-chain management and other functional specializations once considered beyond its domain.

Despite the progress, some critics contend that SAP needs to go on an acquisition binge in order to expand into fertile new areas, such as business intelligence and perhaps even security. But SAP is likely to resist mergers, as it has in the past, and concentrate on internal growth. This is a key cultural trait that will be closely watched as the industry lurches toward consolidation, but Kagermann gives little indication that SAP plans to change its ways.

"We have done some acquisitions, but all of them have been small, targeted and more down-market," he says. "That's the style of SAP."

It's a style that has served the company well, allowing it to survive every major innovative threat for more than 30 years. The next few years could well be the best.

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